What do people actually know about personal finance?
Not much, it seems...

Sunday, July 26, 2009

Where Do People Get Financial Information?

The financial decisions people have to make today are quite complicated, and the financial markets we interact with have made finances even more complicated. So, in such a complex world, where do people turn to for advice when making financial decisions? Survey after survey show that one of the primary sources of information are family members. Colleagues and friends are another common source. This is an important finding. A lot of financial transactions happen within the family and family members naturally exchange information and advice. Moreover, we spend a lot of time at work and the workplace is a natural environment in which to get information and exchange ideas. However, is it a good idea to rely mainly on family and friends for financial advice? Because there is inherently asymmetric information in this type of exchange (those who ask know less than those who provide information), it may be hard to know whether the advice one is receiving is sound. We trust family members to do right by each other, and it might be possible to know whether someone has made good decisions and trust that it is safe to follow in their footsteps. I have an older sibling and I have learned a lot by simply following some of the decisions she has made. But financial acumen is not always verifiable. We cannot always know whether our friends have chosen the best mortgage, how they invest their retirement wealth, and what they do with their credit cards. People do not go around with financial statements around their necks and the fact that someone has a nice house and a nice car might be an indication of a lot of debt rather than a lot of savings. Trust is important when it comes to financial information, but should trust trump expertise? If people around us are not really more knowledgeable in finance than we are, do we improve our knowledge by seeking advice from them? Ask yourself: would you trust a family member who is not a health care professional for medical advice? Finance is no less complicated than health, and the consequences of bad financial decisions can be as dire as taking the wrong medicine or leaving an illness untreated.

I am always intrigued by how much people like to dispense financial information and financial advice. Because I have been traveling a lot in the past few months, I have gotten a good deal of financial information and financial advice from taxi drivers, strangers at the airport, and hairdressers. One participant at a conference told me that in his town, everybody gets financial advice from the butcher. I will keep this in mind when I buy my steaks. I like that people are paying so much attention to finance and financial matters these days, and it’s interesting to hear what people are talking about. Some of the suggestions and theories I have heard are brilliant, some are odd, but others are just plain wrong. Finance and financial principles are grounded in theory: they follow laws that do not change based on who is in power or which state you live in; the power of interest compounding is no different in Florida than in California, and it does not change depending on whether the president is a Republican or a Democrat.

If we are so eager for financial information, there is a clear role for a provider of information—a reputable, independent, and expert source. For example, Social Security started to send around statements about Social Security benefits in 1995. This is a laudable initiative and studies have shown that these statements have changed people’s behavior. The Department of Labor is hard at work to find ways to improve and streamline the information provided by pension plan providers. The Securities and Exchange Commission is looking for ways to better inform investors.

I have my own recommendation to offer. If you need financial information, use www.mymoney.gov. It was built by experts to provide financial advice for citizens. It is from a reputable institution that cares about people making good decisions.

Let’s not mix roles. There is a joke in Italian that goes approximately like this: In heaven, the Italians are the cooks, the Germans build cars, and the Swiss are in charge of running the trains. In hell, the Germans are the cooks, the Swiss build cars, and the Italians are in charge of running the trains. As you can see, we Italians like to poke fun at ourselves. But the same principle applies here: ask taxi drivers for directions, hairdressers for a good shampoo, butchers for a good sausage, and your government for good financial advice! You would not ask a taxi driver for a haircut or send to the Treasury for sausage, would you?

3 comments:

According to me many people are investing there money in different places, but they don't have proper knowledge about it. People should not invest blindly or without any knowledge otherwise there may be some chances of risk. First step is to see, second is to check, third is to inspect, forth is to interrogate and finally the fifth is to decide by following this step we can increase our literacy of financial matters. For more details on Financial Illiteracy refer http://www.prime-targeting.com/get-rid-from-financial-illiteracy/

I agree with you. Most of the people get the financial information through electronic media & news paper also. Yet there are lots of people have not much knowledge about finance and they people invest only traditional way.

The school system and the financial services industry have done a poor job of educating the public about money. I suggest that most people learn through trial and error. The sad part is that in the last couple of years people have suffered due to their lack of knowledge.

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About Me

Annamaria Lusardi is the Denit Trust Distinguished Scholar and Professor of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.